Where to invest: Fixed income or stocks

Lynda C. Corpuz
Learn and pick what to include in your 2014 portfolio as experts distinguish between fixed income and stocks

MANILA, Philippines – It is not about what fancies you. The favorable outlook is not the sole factor to consider. These, among other considerations are what you have to keep in mind – and apply – if you are new to investing or diversifying your investments in 2014 and beyond.

To help you decide where to invest or what to do with your current investments, personal finance gurus Kendrick Chua and Ricky So each distinguish between fixed income and stocks as shared with the audience of MoneySense Live – Where to Invest in 2014, held last month at Megatrade Conference Center, Megamall Building B.

Differentiate between fixed income and stocks.

Fixed income is an investment that provides fixed periodic payments and the eventual return of principal. Long-term negotiable certificate of deposit (LTNCD), preferred shares, special deposit accounts, and bonds are types of fixed-income instruments.

Equities or stocks represent a corresponding ownership or interest in a corporation. Common stock has a representation of ownership; the owner shares in the success when a company profits; has voting rights; at risk if the company falters; and has the last claim on dividends during liquidation.

Preferred stock is “senior” than common stock; pays dividend based on par value; has no voting rights; and has limited risk and potential.

Identify what investment suits you.

“Retail treasury bonds are suited for newbie investors [since it has a] low minimum investment [of] P5,000,” Kendrick suggested.

Interest income from periodic payments and capital appreciation are two of the ways that you can earn from fixed income. LTNCDs indicate an amount of bank’s indebtedness with a designed maturity, while special deposit accounts have short-term liability offered by the Bangko Sentral ng Pilipinas (BSP) with tenors ranging from several days to two months.

Meanwhile, bonds are either government or private issues and are also available as foreign currency denominated bonds. Corporate bonds have higher interest compared with government securities and are usually used to finance expansion or to retire existing bonds.

For neophytes in stock investing, Ricky said, “I always tell them [to invest] the amount they are willing to lose. Some brokers accept P5,000, some [accept] more than this [amount]. Consider it their tuition. But [they should not invest] so small [an amount] that they will not exert some effort to take care of it,” Ricky advised.

Weigh the advantages and disadvantages.

Regular or a steady stream of income; low volatility that helps reduce the overall vulnerability of your portfolio; the principal is paid back upon maturity; and can be readily sold in the secondary market are the advantages of investing in fixed income, Kendrick cited.

The disadvantages include risks like the future fixed income may provide higher interest rate than the current one; the interest may not be higher than inflation resulting in negative real return; and the issuer may not be able to continue interest payments or principal, Kendrick cautioned.

High potential return, liquid asset, availability of information, and low capital requirement are the pros of investing in stocks, Ricky enumerated. High volatility and management challenge are the cons to be dealt with when investing in stocks, Ricky warned.

Know when to be passive or aggressive when investing in fixed income.

It all depends on how risk-savvy or risk averse you are, Kendrick explained in an email response to Rappler. “For a newbie investor, investing in fixed income would allow him to receive passive income in the form of interest (bonds/LTNCDs) or dividends (preferred shares) regularly.

The same goes for a passive investor whose sole purpose of investing is to receive passive income. For an aggressive investor, he could buy/sell bonds in the secondary market to profit from the rising bond prices. That is, if he finds the interest payments a bit ‘boring.’ There is money to be made in trading bonds after all.”

The downside for newbie and passive investors is that once a higher-yielding fixed income/bond comes along, the value drops. So not only are you not able to capitalize on the higher interest, your investment drops in value, Kendrick illustrated.

Know what and when to buy or sell stocks.

“Stocks over long term always outperform bonds, bills, [and] inflation. It is liquid as you are able to sell especially highly traded stocks. Volatility or market risk is [the main con of investing in stocks], understandably because of the general high return characteristic. Moreover, the difficulty lies in what stocks to buy and when to buy even if you know the companies by name,” Ricky explained in an email response to Rappler.

“[On a] business perspective, when Company A [borrows] for 10 years with a rate of 7%, then [it] uses the money to operate the business. [The company] would normally, try and strive to recover the cost of money (7%), thus making more for the company shareholders,” Ricky illustrated.

Learn from the past, anticipate the rosy outlook.

Kendrick assessed that 2013 is a year of two stories for fixed income. “[The] first half is a tale of rising bond prices. [The] second half is the reverse because of the reaction to the US Federal Reserve Systems’ quantitative easing. We may see interest rates rising this year. If that does happen, we will see bond prices falling, which may not be so good for aggressive investors who bought these bonds when the interests were low,” Kendrick explained.

But there is always the flip side. “… Aggressive investors could also look into buying these bonds at a discount and hold them until maturity or when prices go back up again. For [the] newbie investors, this could benefit them since we could see interest rise in the short-term, [as] higher coupon rates [is equal to] higher interest payments,” Kendrick cited.

As for stocks, Ricky said that the power sector and the construction industry will do well for 2014. “On the other hand, the beaten down mining industry can pull off a surprise not so fundamentally, but rather technically,” Ricky cited.

Fundamentally analyzing stocks involves examining the macro economy – gross domestic product, inflation, fiscal and monetary policies, sector and company analyses, book value, earnings and rations, dividends, and cash flow.

Technically analyzing stocks, meanwhile, consider that the historical performance of stocks and markets are indicators of future performance. “Technical analysis is done by the investor (preferably) … some brokers share their views. The time frame will depend on the type of investor: long-term investors look at monthly, weekly, and at least daily, while short-term traders look at daily, hourly, and 5-minute charts,” Ricky explained.

Assess how risky can you get with your stocks. “Conservative investors should consider preferred stocks and some dividend paying blue chip stocks. Aggressive investors will be bored with what were mentioned, [as] these people normally invest in the high volatile issues,” Ricky said.

Whether to trade or invest in stocks, it is all up to you, Ricky said. “Trade is short-term. Invest is long-term. They can decide. But for starters, they can do this simultaneously, say put in P20,000—the P10,000 is for long-term while the other half is for trading. After a while, one will be able to determine which approach suits him,” Ricky advised. – Rappler.com

For over 11 years now, Lynda C. Corpuz has extensively covered business, finance, personal finance, management systems, arts and culture, health, parenting, and women issues as a journalist and editor, with relevant research, public relations, and management experience. On free occasions, she blogs at lyndaccorpuz.wordpress.com and descovrir.blogspot.com.

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